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Why Cummins (CMI) is a Great Dividend Stock Right Now

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Whether it's through stocks, bonds, ETFs, or other types of securities, all investors love seeing their portfolios score big returns. But when you're an income investor, your primary focus is generating consistent cash flow from each of your liquid investments.

While cash flow can come from bond interest or interest from other types of investments, income investors hone in on dividends. A dividend is the distribution of a company's earnings paid out to shareholders; it's often viewed by its dividend yield, a metric that measures a dividend as a percent of the current stock price. Many academic studies show that dividends make up large portions of long-term returns, and in many cases, dividend contributions surpass one-third of total returns.

Cummins in Focus

Based in Columbus, Cummins (CMI - Free Report) is in the Auto-Tires-Trucks sector, and so far this year, shares have seen a price change of -20.78%. The engine maker is currently shelling out a dividend of $1.14 per share, with a dividend yield of 3.26%. This compares to the Automotive - Internal Combustion Engines industry's yield of 1.63% and the S&P 500's yield of 1.95%.

Taking a look at the company's dividend growth, its current annualized dividend of $4.56 is up 8.3% from last year. Over the last 5 years, Cummins has increased its dividend 5 times on a year-over-year basis for an average annual increase of 13.30%. Any future dividend growth will depend on both earnings growth and the company's payout ratio; a payout ratio is the proportion of a firm's annual earnings per share that it pays out as a dividend. Cummins's current payout ratio is 33%. This means it paid out 33% of its trailing 12-month EPS as dividend.

Earnings growth looks solid for CMI for this fiscal year. The Zacks Consensus Estimate for 2018 is $13.28 per share, representing a year-over-year earnings growth rate of 25.05%.

Bottom Line

Investors like dividends for a variety of different reasons, from tax advantages and decreasing overall portfolio risk to considerably improving stock investing profits. However, not all companies offer a quarterly payout.

Big, established firms that have more secure profits are often seen as the best dividend options, but it's fairly uncommon to see high-growth businesses or tech start-ups offer their stockholders a dividend. During periods of rising interest rates, income investors must be mindful that high-yielding stocks tend to struggle. With that in mind, CMI presents a compelling investment opportunity; it's not only an attractive dividend play, but the stock also boasts a strong Zacks Rank of #2 (Buy).


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